Pick your movie metaphor, but it appears that the U.S. Dollar and the Euro are entwined in their own version of the “Last Tango in Paris”, where neither is sure where the relationship will head, but time marches on. Ever since the Greek debt crisis hit the global stage in May, markets have been in turmoil, until finally resuming something short of normalcy in the past few weeks. Volatility has subsided. Fundamentals seem to mean something once again, but uncertainty still hangs like a foreboding cloud over the horizon.
A look at the “EUR/USD” chart history for the past year does not reveal any hints of where it might head either:
Forex news reports have showcased the Euro’s ten-year march to fame and glory. It bobbled in 2008 when Lehman Brothers went down, but resumed its march thereafter, only to tumble once again in May. It rests now around the $1.30 mark, the same range it visited during its 2008 fall. Perhaps, U.S. tourists and businessmen will get more for their buck when traveling to Europe these days, but there are more important issues to consider going forward.
The Euro and Greenback have been tied together in this sideways trading pattern for over a month. German exporters are brimming with confidence and have been quick to grasp a competitive advantage in the global export market, luxury cars and all. U.S. exporters remain hopeful, but the turmoil in commodity markets happened after planting season had already begun, leaving no opportunity to adjust priorities. U.S. importers are eyeing European goods once again, but more imports, even at reduced prices, will only exacerbate a deficit-laden trade imbalance and weaken the Dollar more. The two dance partners twirl about as all onlookers debate when the dance will end and a breakout will occur.
Europe has well-documented debt issues among its weaker member states, known euphemistically as the PIIGS (Portugal, Italy, Ireland, Greece, and Spain). Concerns about a possible Greek default on its national debt are surfacing again in the news, and German bankers are disturbed that Spain has ignored requests for fiscal austerity and resumed public spending on national projects. The U.S. has debt and deficit problems of its own, corporations are sitting on nearly $2 trillion in cash but will not hire domestically, and any government policy changes in an election year are highly unlikely.
On balance, the relative value of the respective economies may be deadlocked due to fundamentals for some time to come. As for near-term projections, the analysts at Forecasts.org stand by their forecast of a weakening Dollar for the remainder of the year, as the Euro rises to $1.35 in December and crests at $1.36 in the quarter thereafter. Although there has been a brief dollar comeback of late related to not only the Euro, but also other “basket” currencies, the question is will this strength hold if poor preliminary GDP news is released this Friday? This entire week is laden with economic data releases, and consumer confidence figures and another speech by Fed Chairman Bernanke will complete the Friday trinity, so to speak.
The major “elephant in the room” that is blocking progress is the need for domestic growth. Domestic growth creates employment and increases tax revenues that can reduce deficits and pay down debts. According to the IMF’s recently published “World Outlook Report”, GDP growth for developed countries of the world has been on a 40-year decline from 4% in 1970 down to 2% for 2010 and the five years ahead. A GDP growth figure of 1.5% is seen as necessary to provide enough jobs for the growing population on annual basis. While we languish about 2%, developing countries are more in the 8% range, with China trying to rein their industrial growth machine back to 9.7% for 2010.
Gold has also made an incredible run up of 7% in the last four weeks, indicating that risk aversion is once again creeping into market psychology. Concerns of a possible double-dip recession or a Greek default have investors worried. Although corporate earnings were up in the stratosphere, the emphasis was on Asia for future growth, while most of Asia is presently consolidating their near-term growth plans. Pessimists believe that a major drop in the S&P 500 is imminent.
But, the beat goes on, as does the “EUR/USD” dance. In the “Last Tango in Paris”, Marlon Brando recants from his young French protégée, but soon presses for more commitment, only to be rebuked by a gunshot that leaves him dying on a staircase balcony. The two lovers were “caught up in the frenzied beat of a carnal dance they could not seem to stop.” Hopefully, our Greenback will have a better fate, or at least choose a waltz instead.
